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Is U.S. Government ‘Outsourcing Its Brain’?
Boom in Tech Contracts Sparks Complex Debate; A Mecca in Virginia
By BERNARD WYSOCKI JR. / March 30, 2007

TYSONS CORNER, Va. — The moment visitors arrive in the lobby of the
campuslike headquarters of Mitre Corp., they’re asked: Do you have a
national-security clearance?

If the answer is yes, Mitre’s receptionists tap a few computer keys to
verify. If it’s no, the visitor gets a special badge and a constant
escort. It’s the sort of scrutiny one might expect at the Defense
Department or a U.S. intelligence agency.

Mitre is one step from that: a private company with one major client,
the U.S. government. Mitre does high-tech engineering and other
computer work for the Pentagon, various intelligence agencies and the
Department of Homeland Security — and business is booming.

“There is no doubt that post-9/11 there is more growth than we have
experienced historically,” says Chief Executive Alfred Grasso. In
2006, Mitre, a nonprofit that runs three federally funded research-and-
development groups, says revenues topped $1 billion for the first

Since the 2001 terrorist attacks and wars in Afghanistan and Iraq, the
federal government’s demand for complex technology has soared. But
Washington often doesn’t have the expertise to take on new high-tech
projects, or the staff to oversee them. As a result, officials are
increasingly turning to contractors, in particular the hundreds of
companies in Tysons Corner and the surrounding Fairfax County that
operate some of the government’s most sensitive and important

The risk of this approach, in the words of Warren Suss, a Jenkintown,
Pa., consultant and expert on federal computer outsourcing, is that
the government could wind up “outsourcing its brain.” The number of
private federal contractors has soared to 7.5 million, four times
bigger than the federal civilian work force itself, according to Paul
Light of New York University. Congress, meanwhile, is learning how
hard it is to keep tabs on these activities.

As a Mecca for this sort of work, Tysons Corner has emerged as
outsourcing central. Once known mostly for its shopping malls, it’s
now a land of glass towers, manicured office parks and Tiffany
boutiques, where private-sector budget analysts, project managers and
highly paid executives do the work that clock-punching civil servants
in downtown D.C., 10 miles to the west, can’t do.

The government still buys pencils and office furniture, but now relies
on others for sophisticated technology work, especially what’s known
as “systems integration” — pulling together complex information
networks for the military, homeland-security personnel and others.

“Our ignorance is their gain,” says Richard Skinner, inspector general
at the Department of Homeland Security. Projects currently under way
range from the design of next-generation military computer networks to
the oversight of a $30 billion electronic “fence” being built along
the Mexican border.

Teaming Up

Outsourcing originally sprang from concerns about overspending and
mismanagement by the government itself. Starting in the 1980s,
agencies realized it was cheaper to buy certain services directly from
companies. In the 1990s, teaming up with the private sector became a
popular idea, in part as a way to reduce the number of federal
employees on the books.

Today, the potential pitfalls are legion. Big contracts are notorious

for cost overruns and designs that don’t work, much of which takes
place under loose or ineffective government scrutiny. Underlying this
tension is the fundamental question of whether one system is better
than the other.

Democratic Rep. Henry Waxman of California, new chairman of the House
Oversight and Government Reform Committee, has castigated the
Department of Homeland Security for lax oversight of the Coast Guard’s
$24 billion fleet modernization, which is being run by two defense
giants. He has also faulted its management of the “fence” project,
formally called the Secure Border Initiative, complaining that 60 of
the 98 people overseeing the border project are contractors.

Outsourcing details to private contractors “can be a prescription for
enormous fraud, waste and abuse,” Rep. Waxman said during a February
hearing on the issue.

Mr. Skinner, the Homeland Security inspector general, says his
investigation into the Coast Guard project, known as Integrated
Deepwater System, found inadequate management and oversight, resulting
in delays, cost increases and design flaws.

Deepwater, awarded in 2002, is a 25-year program aimed at upgrading
the Coast Guard’s boats, aircraft and communications systems. The
contract was awarded to a joint venture of Lockheed Martin Corp. and
Northrop Grumman Corp. Unlike standard contractors, they were given a
bigger role overseeing the project’s many different strands.

Mr. Skinner says his office found that the top decision makers were
contractors, not civil servants. The Coast Guard was relegated to the
role of “adviser” on technical matters, and was essentially shut out
of decisions on subcontracts. Partly as a result, he says, the cost of
the first two large armed boats, called cutters, is expected to be
well beyond the $775 million original estimate.

During congressional hearings on the matter, a Lockheed Martin
executive defended the program. The performance “has been closely
supervised by the Coast Guard” with additional oversight by Homeland
Security, Congress and the Government Accountability Office, he said.

The Coast Guard recently stripped some management work from the
Northrop-Lockheed venture, saying it could acquire 12 smaller cutters
faster and at lower cost.

Mr. Skinner says Homeland Security is also trying to exert more
oversight over its “fence” project. One problem is that the
department, with 900 procurement officers, constantly battles
turnover. He says the department is lucky if it can keep procurement
personnel for three years before they bolt — to places such as Tysons

Once a sleepy crossroads, the area has boomed in part because of its
location halfway between downtown Washington and Dulles International
Airport, straddling the Beltway that rings the capital.

The Tysons area and surrounding Fairfax County have enjoyed the boom
in federal procurement in the post-9/11 era, with $18 billion of work
performed in the area in 2006, up from about $10 billion in 2000. To
economists such as Stephen Fuller of nearby George Mason University,
Tysons is a natural anchor for outsourcing, close to the “honey,” of
the federal government, and attractive to young engineers and

One flashpoint today is whether contractors hire other contractors
without enough controls or competition. In March, Rep. Waxman
introduced a bill that would put limits on contracts awarded without
competitive bidding. It passed the House by a wide margin and is
raising fears among contractors that it could dent their growth.
Federal procurement is already expected to slow because of budget
constraints and the slowing of the post-9/11 spending boom.

Rep. Waxman’s staff, in a Feb. 8 memo, said that “at least one
contractor hired to engage in contract oversight on the border
project, Booz Allen Hamilton, may have a conflict of interest with
Boeing Co.,” the prime contractor. Booz Allen has done consulting work
for Boeing and has been a member of the Boeing team on other

Ralph Shrader, chief executive at Booz Allen, flatly denies the
charge. “I take the greatest exception to the idea of conflict of
interest,” Dr. Shrader says, adding that Booz Allen is doing “support”
and “coordination” work on behalf of the government, and doesn’t
“oversee” Boeing. He adds that Booz Allen has for decades taken pains
to avoid conflicts of interest, and has a rigorous process to avoid
such conflicts. (Dow Jones & Co., publisher of The Wall Street
Journal, has hired Booz Allen to help the company with its news

Booz Allen epitomizes the successful, well-connected Tysons consultant-
contractor on a giant scale. Once mostly a management consultant to
corporations based in New York City, Booz Allen’s government business
now accounts for more than 50% of its $4 billion in revenue. In 1992,
it moved its headquarters to Tysons Corner.

The firm’s past three CEOs have come from the government side of the
firm. Dr. Shrader, with a Ph.D. in engineering and CEO since 1999, had
experience on the commercial side early in his career. Since 2000,
Booz Allen’s revenue has doubled in size. It plans to hire 4,000
people in 2007 alone, adding to an existing work force of 18,000

Booz Allen has extensive government contracts — totaling more than $2
billion a year — with the Pentagon, intelligence services and various
civilian agencies, including the Department of Homeland Security.

It employs numerous retired military officers and former intelligence-
agency chiefs. Retired Navy Admiral J. Michael McConnell, former head
of the National Security Agency, was a $2 million-a-year Booz Allen
executive until President Bush named him director of national
intelligence in late 2006. James Woolsey, former head of the Central
Intelligence Agency, is another rainmaker.

Booz Allen does so much business with the Department of Defense that
it conducts brown-bag lunches for young civilian recruits dubbed “DOD
101,” where it explains, among other things, the difference between
the insignia of a captain and a general. Ex-military types attend a
“forum” to learn the commercial ropes, as well as ways of working in
less hierarchical environments.

The company argues that it can mobilize staff more quickly and cheaply
than the government. As one example, Booz Allen cites its work on the
Pentagon’s communications network, which was damaged in the 9/11
attack. Booz Allen says it put together a special “surge” team to
design what it calls “survivable telecom system.” It turned the plans
over to the Pentagon in just six weeks.

Grand Database

Among its more controversial projects was Total Information Awareness,
a Defense Department plan for a grand database to thwart terrorists.
It was conceived shortly after the 2001 terrorist attacks, and soon
came under criticism from members of Congress and others as a privacy
invasion, before being scrapped. “I really have no problems with the
decisions we have made,” says Dr. Shrader, who adds, without being
specific, that “there are things we have chosen not to do.”

Booz Allen has filled up its headquarters, which is technically
located in McLean, Va. County zoning rules won’t let the company add
more people beyond its current 6,500, so Booz Allen has set up another
campus near Dulles airport, which housed 1,700 people as of February.

Fueling the growth at Booz Allen and other big firms is a move toward
giant, complex projects, awarded by Uncle Sam but pulled together by
what’s called a “lead systems integrator.” Big contractors have become
even more powerful in the post-9/11 era, some say, because the
government has turned conservative, preferring to award contracts on
critical national-security projects to proven players, especially as
knowledgeable civil servants retire.

The U.S. government “is losing their system engineering, program
management, acquisition expertise,” said Kenneth Dahlberg, CEO of
Science Applications International Corp., of San Diego, at a recent
Wall Street investor conference. He vowed that his company, one of the
biggest federal contractors with 44,000 employees, would be there to
fill the void. SAIC recently formed a special team to go after big
government contracts valued at $100 million or larger.

Portraits at the Palm

The contracting industry has consolidated recently, with big guys
buying up many midsize firms. That’s apparent from the walls of the
tony Palm restaurant in Tysons Corner. Unlike its downtown Washington,
D.C., counterpart, which displays caricatures of people from the
political world, the portraits at the Tysons Palm run toward local
technology entrepreneurs and founders of federal contracting
companies, many of whom have made fortunes selling to big contractors.
One is of Ed Bersoff. He founded BTG Inc., a government-contracting
company, and sold it for $174 million in 2002 to another contractor,
which has itself since been acquired.

In this small neighborhood, big contractors have started bumping into
each other. A few years ago, Booz Allen tangled with next-door
neighbor SAIC after the road near the two companies’ office towers was
named “SAIC Drive.” After some back and forth, that part of the road
was given a new name: Solutions Drive.

Fairfax County is now home to 358 foreign-owned firms, some of which
have been lured by the county’s Economic Development Authority, which
has five overseas offices. Recently, Camero Inc., a unit of a Tel Aviv
company, set up shop in Tysons Corner so it can better promote a radar
system that can see through brick or concrete walls.

Robert Judd, the president, says he considered Arlington, Va., but the
atmosphere seemed very Pentagon-centric. The office parks near Dulles
seemed too commercial in nature. So he settled on Tysons, halfway
between them, and a blend of the two.

The one drawback is the traffic. “We work 7 a.m. until 4 to avoid the
worst of it,” says Mr. Judd.

{Write to Bernard Wysocki Jr. at bernie [dot] wysocki [at] wsj [dot] com}

Outsourcing Bonanza

A sampling of large federal contracts
Company Value Covers Relevant agency

Electronic Data Systems Corp. $3.26 billion Data processing and
telecommunications Defense Department/Navy
$1.66 billion Electronic identification systems Multiple agencies
$295.9 million Defense enterprise services Defense

Northrop Grumman Corp. $10.14 billion Sustaining B-2 bomber Defense/
Air Force
$3.93 billion Aircraft carriers Defense/Navy
$3.9 billion Amphibious assault ships Defense/ Navy

Computer Sciences Corp. $2.2 billion Engineering services Defense/Air
$1.41 billion Prime integration services Treasury/Internal Revenue

Booz Allen Hamilton Inc. $1.29 billion Information system design
Multiple agencies
$595.4 million Management, organization improvement multiple agencies

Science Applications International Corp. $1.95 billion Computer aided
design Health and Human Services/

National Institutes of Health
$1.92 billion Automated data-processing software multiple agencies

Source: Eagle Eye Publishers, based on public federal data

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